Southeast Asia's gaming startups win by branching out

Newcomers follow successful business model of China's Tencent

AKIHIDE ANZAI, Nikkei staff writer

Online gamers at a video game cafe in Singapore.

TOKYO -- Gaming startups that take their cues from Chinese tech giant Tencent Holdings are on the rise in Southeast Asia, stoking investor interest in the potential for the same diversified approach to succeed in the region.

The Garena example

At a gaming cafe in downtown Singapore, young people are absorbed in "League of Legends," the online multiplayer battle title that has drawn about 100 million enthusiasts worldwide. Garena Interactive Holding, a local internet company, won the right to distribute the global hit in the region, along with other popular PC and smartphone games.

Southeast Asia's video game market is growing explosively. The demand is projected to jump to $4.7 billion in 2019 -- double the figure in 2016, according to Dutch research firm Newzoo.

Garena, established in 2009, rode the wave to build an operation that spans seven Asian markets, including Indonesia and Vietnam. Its customer base stands at 140 million registered users.

The secret to Garena's success lies in the multiple services the company employs to capture users, said Group President Nick Nash. For instance, there is AirPay, the online payment vehicle launched in 2014. It allows young gamers who do not have access to credit cards or bank accounts to pay online gaming fees by depositing money at net cafes or convenience stores.

Garena, recognizing the pay service's potential for e-commerce, rolled out the Shopee smartphone flea market app in 2015. The app, home to 1.4 million vendors, lets users negotiate prices via chat. Its annual gross transaction value reached $2.5 billion as of the end of February.

Model of success

Expanding the customer base through video games and connected web services is the business model employed by Tencent, the world's largest game publisher. Although the game business accounts for about 70% of sales, 800 million people also use the group's WeChat messenger. Other services include the WeChat Pay platform. Tencent is adding to earnings by linking its gaming, social networking and payment operations, attracting users across those target markets.

To the Southeast Asian internet companies, the Chinese tech giant is a model of success that is also close to home. Many startups in the region have followed its business approach. One who openly attests to learning many lessons from Tencent as well as successful companies in the world is Le Hong Minh, CEO of Vietnam's leading digital content company, VNG.

The company developed the chat app Zalo in 2012, just a year after WeChat's debut. Just as WeChat is customized for the Chinese market, VNG tweaked Zalo for the convenience of Vietnamese speakers. The company also focused on optimizing usability in other areas, such as the speed of messaging and uploading photos, said Minh.

Zalo has now grown into what is effectively Vietnam's national chat app, boasting 70 million users, or 80% of the country's population.

Seeing unicorns

This model also has its advantages on the earnings front. Although social networking and chat apps are generally available for free, companies can charge money through games, making them a stable source of income. In Southeast Asia in particular, games can be monetized quickly with barely any investment, said Nico Nolledo, CEO of Philippine game developer Xurpas.

Venture capital also expects these startups to track Tencent's growth. Garena raised funds from several investors, including Singapore's government-affiliated investment arm. Although Garena remains unlisted, the company is called one of Southeast Asia's biggest unicorns, valued at well over $3 billion. There are rumors that Garena will float an offering on Wall Street this year.

Tencent itself has held stakes in Garena and VNG for years, exerting its influence on those startups over that time. The Chinese developer has advanced tie-ups in video games and other areas in an apparent effort to penetrate the Southeast Asian market. China's online retailing heavyweight Alibaba Group Holding is also active in that arena, buying out Southeast Asian competitor Lazada and joining hands with Thai conglomerate Charoen Pokphand Group in the online payment business.